Can a more vocal Bernanke keep Fed on message?

By Pedro Nicolaci da Costa

WASHINGTON (BestGrowthStock) – Ben Bernanke is ready for his close-up.

As the Federal Reserve tries to counter suspicion of its latest $600 billion stimulus plan, it is making a concerted, if awkward, effort to raise the chairman’s profile and harmonize the often-dissonant message from within the central bank.

One big fear Bernanke must counter stems from the Fed’s bloated balance sheet: with some $2.3 trillion in reserves sloshing around the U.S. banking system, some economists and many Republican politicians say inflation is bound to get out of hand.

Another element of the Fed’s image problem is the lingering stigma of Wall Street bailouts during the financial crisis, brought to light again last week by data revealing just how heavily major investment banks, including foreign ones, leaned on the Fed for survival.

Barely two years later, the same banks have returned to making handsome profits and rewarding executives with gold-plated pay packages, even as the unemployment rate remains near 10 percent.

An appearance by Bernanke on CBS television’s “60 Minutes” program on Sunday was the Fed’s latest push to defend its controversial drive to lower borrowing costs from political encroachment and intense criticism from overseas.

In a first for a Fed chairman, Bernanke published an opinion piece in The Washington Post just hours after the bank launched a new round of monetary easing on November 3. He has also appeared at two unscripted question-and-answer sessions on university campuses in recent weeks.

It will not be easy to fight the view that any Fed action, even a broad easing of monetary conditions, amounts to a bailout of the financial industry. About half of Americans are less confident in their central bank today than five years ago, according to a Thomson Reuters/University of Michigan survey published in November.

Politicians, normally circumspect on matters related to interest rate policy, have not been shy about critiquing the Fed’s bond purchases and the inflation risk they pose. Many Republicans want to rewrite the Fed’s mandate to focus solely on inflation, dropping its aim to foster full employment.

“Once monetary policy becomes a political issue you have to try to appeal to a broader audience than Wall Street investors,” said Maury Harris, chief U.S. economist at UBS.

“What’s happened is that people treat it like it’s another TARP,” he added, referring to the Treasury Department’s rescue fund for big banks. “It’s viewed as, ‘if the Fed is printing money they must be bailing out somebody.'”

Economic growth, at just 2.5 percent in the third quarter, is still too sluggish to put a dent in the unemployment rate, which in November rose to 9.8 percent. Inflation remains low, giving officials comfort that they can ease monetary conditions without causing a surge in prices.

“This fear of inflation I think is way overstated,” Bernanke told “60 Minutes.” “What we’re doing is lowering interest rates by buying Treasury securities. We hope to stimulate the economy to grow faster.”

“One myth that’s out there is that what we’re doing is printing money,” he added. “We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”


Communications have always been a tricky game for the Fed. Too little can leave financial markets in the dark, boosting uncertainty and volatility. Alan Greenspan, Bernanke’s predecessor, tended more toward secrecy and became famous for his cryptic and sometimes unintelligible comments.

Bernanke’s experience in academia makes the South Carolina native prone to a less hierarchical, more collegiate approach to policymaking than Greenspan. He has also long been an advocate for greater transparency.

“Ambiguity has its uses but mostly in non-cooperative games like poker,” Bernanke said in 2003 as a Fed governor. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.”

Since taking office in 2006, the chairman has made the Fed’s once-opaque statements more descriptive, and begun releasing official economic projections more frequently and in greater detail.

“While some of the open-mouthed monetary policy is an attempt to ward off political pressure, Bernanke since the beginning of his tenure has endeavored to improve the communications of the Federal Reserve, so the ’60 Minutes’ interview is in keeping with this long-term strategy,” said Anthony Crescenzi, a managing director at PIMCO.

As part of this evolution, the Fed is now actively debating an explicit inflation target. Bernanke has said he would like to see inflation — which by some measures is now less than 1 percent — at around 2 percent, or just below.


Despite the progress in lifting the Fed’s veil of secrecy, the soft-spoken 56-year-old Fed chief has also learned that too much transparency can muddle the central bank’s message.

“The hawks aren’t helping things. They’re a minority and they’re not even that big a minority, but they’re very loud and they talk all the time,” said Michael Feroli, chief U.S. economist at JP Morgan and a former Fed staffer.

Internal dissent has been unusually sharp for an institution that prides itself on consensus-building.

One of the most prominent critics of the Fed’s policy of rock-bottom interest rates is Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. He has called the Fed’s latest round of bond purchases a “bargain … with the devil.”

He has earned sympathy from other regional Fed presidents and Kevin Warsh, a governor on the Fed’s Washington board. James Bullard, head of the St. Louis Fed, says disagreement among Fed officials represents a “healthy debate.”

“We should not be the Politburo and we should not be indecipherable,” he said. “If there is some dissent within the committee, I think markets should be aware of that and they can factor in where the committee might go in the future.”

Bullard raised eyebrows with his own drive for greater openness when he co-hosted CNBC-TV’s “Squawk Box” at the St. Louis Fed building in October, just as the Labor Department was releasing the market-sensitive U.S. jobs report.

The cacophony of voices has not reassured financial markets, and is seen as a factor behind a half percentage point rise in benchmark Treasury bond yields since the Fed said it would buy more bonds to achieve just the opposite.

Lee Hoskins, former president of the Cleveland Federal Reserve Bank, said Fed officials can help markets understand where the central bank is heading but those who disagree with the Fed’s decisions should let their votes do the talking.

“Voting members should dissent when they disagree and not carp in public,” he said.


As the Fed struggles with how to get its message across, Vice Chair Janet Yellen will oversee a subcommittee on communications guidelines. The group will have “the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release,” according to minutes from the Fed’s November meeting.

The minutes also indicated Bernanke is considering holding periodic press conferences.

This comes in the wake of leaks to the Wall Street Journal following the Fed’s August meeting about its deliberations well in advance of the publication of regular meeting minutes.

A Reuters special report published in September found that former Fed staffers now working as consultants sometimes use their inside contacts to glean rather detailed insights about policy discussions that they then share privately with their clients, who pay thousands of dollars for the information.

Hoskins said leaks by members of the Fed’s policy-setting Federal Open Market Committee “are never acceptable.”

Bernanke has been burned by the financial press before. In 2006, views he shared in private with CNBC’s Maria Bartiromo were aired during her program, leading to sharp swings in stocks and bond prices and embarrassing the chairman just months after he had taken office.

Still, that experience should not discourage him from being more forthcoming. Both research and historical precedent suggest sound economic policy is best conducted in the open.

“It’s very necessary,” UBS’s Harris said. “What they’re doing right now is not easy to explain, and it’s very controversial.”

(Reporting by Pedro Nicolaci da Costa, Editing by Maureen Bavdek)

Can a more vocal Bernanke keep Fed on message?